PE risks of cross-border services to China
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PE risks of cross-border services to China

Great wall of China

Foreign businesses offering cross-border service provisions to Chinese entities must take caution as the tax authorities are becoming more confident than ever in looking into cross-border transactions involving Chinese companies.

China’s State Administration of Taxation (SAT) and a local tax authority have released three tax audit cases on cross-border service provisions to Chinese entities. The cases should make businesses aware of the SAT’s enhanced efforts in PE administration this year. However, these efforts are not completely unexpected. An article written by KPMG for International Tax Review in December 2015, alerted businesses to this fact.

This new article examines the recent tax audit cases, the rules being applied by the tax authorities and the criteria used to determine whether a foreign company’s services to China create a Chinese permanent establishment (PE) for tax purposes. It intends to help foreign businesses reduce the related tax exposures in China.

What is cross-border service provision?

Although there is no official definition of cross-border service provision in China’s tax regime, it’s generally accepted that cross-border service provision means a foreign company that provides its service in China to meet the demands or requirement of its clients in China for a certain period, which means this activity is not permanent and continuous. For example, a foreign oil field service provider registered in the US provides technical service to a Chinese oil company by sending its technical employees to China to provide on-site technical supervision for a certain period and the Chinese oil company pays the service fees to this oilfield service provider. Generally, the service provider is responsible for the expenses relating to its employee working in China for a specified time. 

The audit cases – a summary

Case 1

On July 23 2016, a branch of the Qingdao tax bureau, in China’s eastern Shandong province, announced that they noticed a foreign company sent their technician to its joint venture in China to provide technical instruction from June 2005 to February 2016.

Although every technician came to China for a period of less than 183 days and their wages and costs were paid for by the foreign company — rather than the joint venture in China — the branch of the tax bureau assessed the foreign company has having a PE in China, requiring it to pay the related taxes. The tax charge in this case was relatively small.

Case 2

On August 1 2016, the SAT released a case study on another similar PE issue.

In the case study, a joint venture in China was mainly engaged in designing, developing, manufacturing and selling a vehicle, and providing related parts and after-sales services to customers. Its parent company, which was registered outside China, sent many of its employees to this joint venture to provide technical instruction and after-sales service in China from November 2011 to December 2014. Just like Case 1, every employee stayed in China for no more than 183 days (26 weeks) and they were paid by the foreign parent company, rather than the Chinese entity. The Beijing local tax bureau, which was the authority in charge of this Chinese  joint venture, said this arrangement had triggered a PE in China for the parent company.

As such, it assessed the business’s tax liability and said it owed about $3.6 million in taxes and interest. The interest charged for late payments accounted for about $0.9 million of the total amount.

Case 3

Two days later, on August 3 2016, the SAT released another PE case, which was very similar to the above two cases.

In this instance, a local tax bureau located in the city of Nanjing, capital of China’s eastern Jiangsu province, noticed that one of its taxpayers had made a payment of €22 million ($25 million) to a foreign related party (Company A) for “technical services” as of January 2015. The taxpayer explained to the Chinese tax bureau that the service fee was for their project in Nanjing, for which Company A had sent its engineers and project staff to provide technical support and project management.

The assessing officer at the local tax bureau then worked with their counterpart at the state tax bureau of Nanjing to evaluate if this arrangement had triggered a PE issue. They reviewed all related documents and noticed a statement in Chinese, which stated that the foreign service provider would allocate personnel to the Chinese entity. In addition, the costs associated with the remuneration of these employees will be borne by the foreign service provider. This led to tax officials setting up several consultations with staff at the Chinese taxpaying entity and on-site investigations being carried out. Tax officials finally obtained key evidence, proving that the arrangement had constituted a PE in China for Company A.

In the end, the taxpayers accepted the assessment and settled the applicable taxes, including individual income tax (IIT), amounting to about $4.8 million.

Regulations and rules

So, what is the regulation basis for tax bureaus to levy the taxes in these cases?

Generally, the applicable double taxation agreement (DTA) between China and the country, in which the foreign company resides, should be referred to first. In most DTAs, Article 5 defines PE and Article 7 defines the business profit.

Secondly, circular Guoshuifa [2010] No. 75 provides the departmental interpretation notes (DIN) on the DTA between China and Singapore (China-Singapore DTA), and it is applicable to all DTAs that have similar provisions to those of the China-Singapore DTA. Both taxpayers and tax officials refer to this circular. However, the SAT Public Notice [2013] No. 19 deserves equal attention because it provides more detailed instructions on employee secondment arrangements.

Under Article 5 of the China-Singapore DTA, it describes a PE as follows:

“1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

3. The term "permanent establishment" likewise encompasses:

a)      a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than 6 months;

b)      the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if such activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 6 months within any twelve-month period.”

The three cases referred to above are covered by point (b) of the DTA extract, i.e. service PE. China’s circular Guoshuifa [2010] No. 75 provides a very detailed interpretation of this provision. The key points from this circular that were applied in the three cases include:

  • ‘Service, which refers to the professional services including engineering, technical, management, designing, training, consulting, etc. Circular No. 75 also provides the most popular situations as illustrations for clarification and the three cases fall under these examples; and

  • ‘Connected project’– Circular 75 sets the following criteria to determine whether several projects are connected:

  • Whether the projects are covered by a single master contract;

  • Where the projects are covered by different contracts, whether the contracts were concluded with the same person or with related persons, and whether the execution of one project is a prerequisite to the execution of another project;

  • Whether the different projects are in the same nature; and

  • Whether the projects are implemented by the same personnel.

In light of this, it is easy to conclude that tax officials referred to the definition of “connected project” to assess the tax liability is cases 1 and 2 above.

Secondment arrangements

SAT Public Notice [2013] No. 19 further clarifies the secondment arrangements from the technical and practical perspective to help taxpayers and tax officials to assess the nature of the arrangement, i.e. PE or not PE.

Secondment arrangements are typically used when an employee (or group of employees) is temporarily assigned to work in a different location or for another organisation. Circular No. 19 gives the overriding principle that the foreign service provider (the ‘home entity’) will be deemed as a PE for the service provision in China if the home entity:

  • Fully or partially bears the responsibilities and risks of the secondee’s work; and

  • Normally evaluates and assess the secondee’s performance.

This circular also provides five additional factors that have to be considered when applying the above overriding principle:

  • Whether the service recipient settles payments, such as service or management fees, with the  home entity;

  • Whether the payment to the home entity is more than the payroll related payment to secondees on behalf by home entity;

  • Whether the home entity doesn’t fully pay the amounts received from the services recipient to the secondees, but instead retains a certain amount as a profit;

  • Whether the China individual income tax (IIT) has been fully paid on the wages paid to the secondees when the cost is borne by the foreign related entity; and

  • Whether the foreign related entity determines the number, qualification, payroll standards and working location of the secondees.

It seems that the tax official on Case 3 mainly referred to this circular when assessing the tax liability.

Although there have been several regulations on PE as above, new guidance on PE administration is necessary from the SAT to provide more consolidated and clear instructions for taxpayers and all levels of tax authorities in China. With such guidance, the tax disputes in cross-border transactions should be reduced. However, when such guidance will be published is yet unknown.

Tax implications of service PE in China

Three major taxes should be considered for PEs in China:

  • VAT;

  • Corporate income tax (CIT); and

  • IIT.


SAT Public Notice [2016]No. 29 on consolidating business tax with VAT states that the service provision within China is subject to VAT, while service provisions in China can refer to service providers within China or service recipients in China. Either way, all these services are subject to 6% VAT in China.

As such, all three cases referred to above had already paid the applicable VAT when the service was provided and therefore there was no dispute on VAT for the three cases.


According to the Corporate Income Tax Law (CIT Law), non-tax resident enterprises, which have an establishment or a place in China, must pay CIT on income that is derived by an establishment or place in China when the income is sourced from within China. It should be noted that CIT is also payable on income that is derived from sources outside China but is connected with establishments or places in China.

Generally, the CIT should paid on an actual base or deemed profit basis at the tax rate of 25%, according to Circular Guoshuifa [2010] No. 19. The deemed profit rates vary for different service types as below:

Service type

Deemed profit rates

Construction projects, design and consulting


Management services


Other services or operations

15% minimum

However, it should be noted that the relevant tax authority has the right to adopt higher deemed profit rates than those stated above if there is obvious evidence that such services actually produce a significantly higher profit than others.


Once a PE is triggered, the IIT is applicable for expatriates working for the Chinese PE when their income is sourced from China from the first day they arrived in the country. All of the three cases required the Chinese PE to pay the IIT for expatriates in China for provided services, accounting for a large amount of the total tax payment. The IIT Law and implementation rules provide more details.

In a word, PE has a very critical definition in the tax world because it will decide the tax jurisdiction of a business’s profit.

Before the OECD’s BEPS initiative, many countries started to take measures to implement measures against base erosion and profit shifting to strengthen their tax administration and ensure their own tax jurisdiction is not be weakened.

Therefore, it is necessary for taxpayers to plan ahead when the business units request any cross-border transactions. Early actions should be taken to effectively manage tax exposures in China.

By Maggie Zhuang, tax manager at Chevron China Energy Company

This article refereed to the following sources:

1.                 “‘Secondment’ or ‘service’ – the SAT of China gives its answers” by PWC China (May 2013)

2.                “Tax implications of a Service Permanent Establishment” by China Briefing (May 2013)

3.                “Checklist of hot China tax issues for MNE in 2016” by ITR (December 2015)

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